« January 2009 Table of Contents 
Treading water
Bank failures squeeze suppliers' credit lines,
insurance rates
By James Wright
January 01, 2009
The ongoing global economic and financial crises have
created the most challenging business climate many seafood
companies have ever faced. As the world has confronted
unprecedented turmoil, the global seafood industry has not been
spared during what is shaping up to be - in the United States,
at least - the worst recession in years.
Over the course of 2008, consumers reduced restaurant
patronage and spent less on luxury items, which typically
encompass many seafood items. Demand is down and overall U.S.
seafood consumption could follow; a report by Packaged Facts
released last month said per-capita seafood consumption could
fall to 15.8 pounds in 2009, down about half a pound from the
mark set in 2007.
Also hampering the industry's progress and profits was the
collapse of key financial institutions that had traditionally
served the biggest seafood suppliers. And as risk increased,
the cost of credit insurance soared. While some seafood
businesses were forced to alter ownership or operating plans,
others shuttered their doors.
Shortly after the subprime mortgage calamity forced U.S.
lending firms Fannie Mae and Freddie Mac into federal
conservatorship, Iceland placed Glitnir and two other major
commercial banks - Kaupthing Bank and Landisbanki Islands -
under government control to stave off a wholesale economic
meltdown. Glitnir discontinued its international seafood team
to focus on its domestic industry and in February will become
known as Islandsbanki, its former name. The bank's clientele
included large seafood importers and exporters that rely on
lines of credit to buy raw materials and to finance their
receivables. When the toppling dominoes reached Iceland in
October, the splash was heard around the seafood world.
"The financial crisis has a complexity to it that few
realize," says Colin MacDonald, CEO of Clearwater Seafoods in
Bedford, Nova Scotia. "It has been generated by unmitigated
greed and hubris. I am hopeful that the United States will see
its way out of the recession sometime in the second half of
2009 followed by the rest of the world in 2010."
While the financial market's downfall may have seemed
sudden, economic woes in the United States - and overseas -
happened more gradually; the U.S. dollar had been weakening in
value for a few years.
But it wasn't until Dec. 1, 2008, that the National Bureau
of Economic Research announced that the United States had been
in a recession since December 2007 - something most consumers
already knew. After looking at real personal income, industrial
production and wholesale and retail prices, the NBER concluded
that the current economic downturn could be the longest since
the Great Depression of the 1930s. It will surely be a fitness
test for the seafood industry.
"I believe this is the most challenging financial situation
we've seen in my lifetime," says Tim Antilla, VP and senior
relationship manager at Wells Fargo in Seattle. "Economically,
it remains to be seen [how long it will last]."
A complex situation
The financial market and the economy are separate entities,
yet the two are inextricably linked, as both depend on high
levels of confidence in their respective marketplaces. Whether
on Wall Street or Main Street, lost faith on the part of
investors and consumers led to widespread instability and
uncertainty.
One of the most closely monitored economic indicators, the
Chicago Board Options Exchange volatility index - also known as
the VIX or the fear
index - hit a record high in October. (The
index, which translates overall investor sentiment or expected
movement in the S&P 500 index for the next 30-day period,
was created in 1993, well after the 1929 crash or the 1974 bear
market.)
Consequently, banks have reined in their lending activity,
says Antilla. Limited lines of credit may slow consolidation
within the seafood industry as private equity markets take more
caution.
"Deals will continue to get done, but probably not at the
same rate as in the past," says Antilla. "The availability of
credit has been reduced. It's a function of the de-leveraging
going on in the financial industry for more than a year. What
credit is available is going to cost more."
At seafood buyers' behest, the entire supply chain is
examining ways to trim costs, says John Keane, president of
Capitol Risk Concepts, a White Plains, N.Y.-based insurance
brokerage firm that specializes in seafood. While Keane hasn't
seen "significant manifestations" of the financial collapse in
the seafood industry yet, he says some companies fear sales
will decrease between 20 and 40 percent in 2009.
"A larger number of buyers are saying, 'You're going to have
to find ways to reduce cost without sacrificing quality one
iota,'" says Keane. "That means that everyone has to look at
their supply and logistics chains, take that dollar apart and
put it back together, less expensively. Safety margins, as a
result, shrink substantially. The risk of loss increases."
For seafood importers, the risks are already great because
they essentially have no control of their goods once they
become cargo, Keane adds.
"The complexity of the [seafood] business has grown
exponentially in the last five years," says Keane. "It's a
tough, tough business." In the end, however, it all comes down
to consumer confidence, he adds. "If they don't have the
discretionary income, which supports the industry, then that's
a problem." SClB Lobsters, anyone?
The industry's poster child for the economic downturn has to
be Homarus americanus , the American lobster. Boat prices
plummeted in the fall to under $3 a pound, levels unseen in
decades. Only 18 months before, when there was a supply
shortage and the economy was by all accounts healthier,
wholesale prices ballooned to more than $10 a pound.
What plagues lobster is how consumers perceive it: as a
luxury item, to be enjoyed only on special occasions. Few
opinions were changed even as lobster prices tumbled into hot
dog territory.
"Psychologically, when people see their portfolios going
down, the last thing they'll do is go out and order lobsters,"
says Michael Tourkistas, president of East Coast Seafood in
Lynn, Mass., which operates lobster holding and processing
facilities in New Brunswick, Canada. Before demand plummeted, a
1:1 exchange rate between the U.S. and Canadian dollars had
pinched a Canadian lobster industry accustomed to profiting on
the exchange rate alone. At press time in mid-December, the
Canadian dollar had fallen to the equivalency of 80 cents, a
small salve on their wounds.
Clearwater Seafoods canceled its privatization plans in late
October due to the downfall of Glitnir, which had committed to
financing 10 percent of the deal; a subsequent capital tie-up
deal with Japanese conglomerate Maruha Nichiro Holdings was
also nixed. Last month, Clearwater earned a seven-month
extension from its creditors on nearly $50 million in debt.
"The lending landscape has certainly changed and changed
dramatically for the time being," says MacDonald. "The banks
seemingly have forgotten that their raison d'etre is to lend
funds and instead they have opted for the safe and secure
hoarding of funds, the net result of which will be their income
streams will dry up.
"In tight times it is natural for consumers and companies to
run to security and safety. This is just as true on the supply
side of business," adds MacDonald. "This is partly as a result
of [buyers] being far less cavalier about their offerings."
In this atmosphere of uncertainty, the role of credit
insurance has taken on new importance. The fragmented seafood
industry has many players of varying sizes with a set of
customers that is equally diverse.
Steve Lapsley, VP and industry manager at Euler Hermes ACI
in Owings Mills, Md., says the company had processed 40 percent
more applications through October than the previous year at
that time. The international firm is regarded as the largest
credit insurance agency in the world.
"Demand for our product is way up. People are afraid right
now," says Lapsley. "This is an odd time. There have been other
recessions, but this one happened so quickly. And it's going to
be long and it's going to be deep. The unemployment numbers
that came out [in December] - that's 533,000 more people who
aren't going to have enough money to buy seafood."
For wholesalers, having uninsured business relationships
makes an uneasy situation even more so, says Tourkistas.
"If you don't have coverage, you can't ship to customers
feeling secure," he says. "It creates a huge problem and big
pressure on risk management.
"Not everyone will fare well [in 2009]," adds Tourkistas,
referring to the live lobster industry. "These are extremely
trying times. The most important thing is there's no history;
this is unprecedented. There's no model that we know of and
we've been in business for 30 years."
Traffic halts
With fewer people ordering lobster - or even visiting
restaurants, for that matter - the foodservice industry, a
major driver for seafood consumption, is hurting. It was only a
matter of time before foodservice distributors felt the
repercussions.
In November, Poseidon Seafoods of Charlotte, N.C., announced
it was going out of business after more than 20 years
distributing seafood throughout the Southeast. About 200 jobs
were lost; the company blamed the economic downturn. Calls to
Poseidon officials shortly after the news broke were not
returned.
Gary Karp, executive VP at Technomic, a foodservice
consulting firm in Chicago, says the foodservice struggles were
bound to impact vendors. What's more, the lending landscape has
changed - particularly, asset-based lending is no longer as
viable, he says.
"Five to 10 years ago, if you had shrimp in cold storage,
that was as good as cash," says Karp, adding that the first six
months of 2009 will be "survival of the fittest" for the
foodservice industry.
"Now, because the shrimp market has changed quite a bit and
has become far more volatile, it's harder to get banks to lend
money," adds Karp. "[Companies] are spending less time focused
on consolidation and more time focused on survival."
The casual dining sector is particularly vulnerable during a
recession, Technomic research shows. While expansion by
Portland, Ore.-based McCormick & Schmick's Seafood
Restaurants boosted overall revenues, the chain reported during
its third-quarter conference call in November that traffic at
its 92 restaurants was down by almost 10 percent.
"We believe the current gyrations in the financial markets
have put further psycholo-
gical pressure on the consumer,"
McCormick & Schmick's Chairman Doug Schmick said. "We are
clearly not out of the woods just yet and our expectations for
[2009] reflect this
phenomenon."
Supply shortage?
Economic struggles are not unique to the United States. Even
China's once-booming economy is witnessing decelerated growth.
After several years of double-digit gains, its economy is
projected to grow by only about 8 percent or less this
year.
Struggles are also surfacing throughout Southeast Asia, one
of the top seafood-producing regions in the world. Somsak
Paneetatyasai, president of the Thai Shrimp Association, hinted
in November that Thailand's shrimp production may be cut by 20
percent to match what he expected to be lower demand. Thailand
saw its shrimp prices fall by about 15 percent last year.
The United States accounts for more than 50 percent of
Thailand's shrimp exports, a total that averaged nearly 400
million pounds from 2005 to 2007.
A similar situation is forming in neighboring Vietnam, a
global leader in farmed pangasius and shrimp production. The
Vietnam Association of Seafood Exporters and Producers reported
in November that many of its member companies would reduce
processing capacity by 30 to 50 percent due to reduced orders
caused by the global economic crisis.
When supplies tighten, prices typically rise - another
turbulent scenario that bodes ill for future seafood
consumption.
"There's an old saying, 'The market can stay irrational
longer than you can stay solvent.' One can only hope that
things will settle down sooner than later," says Antilla of
Wells Fargo.
For many seafood companies, the sooner, the better.
Associate Editor James Wright can be e-mailed at
jwright@divcom.com